Yuyun sells food items and products of daily use from a small shop from her home in Central Java, Indonesia. By late February, 2021, Yuyun had four outstanding loans. While four concurrent loans seem excessive, Rahmat Kabir from Hrishipara in central Bangladesh goes a step further. By the middle of 2021, Rahmat had 13 outstanding loans—seven from multiple microfinance institutions (MFIs), five from friends, and one from a neighbor.
However, juggling multiple loans is not common to all micro-enterprise owners. Only two of our diarists from India had more than two outstanding loans—most had either one loan or no loan at all. One such diarist, Manish Chouhan, runs a grocery shop in Madhya Pradesh, India. Manish was trapped in a vicious cycle—reduced stocks due to a drop in income led to lower sales and a consequent decrease in revenue. To break this cycle, Manish had to borrow INR 10,000 (~USD 134.79) from his friends to purchase supplies for his shop.
1. Taking loans is more common in Bangladesh, followed by India and Indonesia
Other possible reasons for the difference in number and value of loans across countries:
The diarists did not divulge the details of loans taken willingly. We had to gain their trust and make them comfortable enough to reveal this information. Taking loans is not a desirable practice in the cultures of some of our countries of research. This may be a significant factor responsible for this reluctance in sharing information, and the levels of reluctance also vary across countries. Another factor is the difference in skills of data collectors who acquired the sensitive information related to credit. However, we can safely assume that these are not the only factors that contribute to the significant difference in the number of loans. Borrowing behaviors may also vary based on historical and market-level aspects of the country, as mentioned before.
2. Banks and MFIs are significant sources of loans
These practices reflect the experiences of our diarists in these countries. Diarists in India prefer to secure loans from banks, with seven out of 10 loans taken from banks. In Indonesia, diarists took almost half of the loans (eight out of 17 or 47%) from MFIs, five from banks, and the remaining four from other sources like cooperatives and friends or relatives. Since we conducted our research in the primary working area of CU Lestari, our partner in Indonesia, several diarists have outstanding loans with the MFI.
Due to the overwhelming presence of MFIs in Bangladesh, diarists took 70% i.e. 19 out of 27 loans from MFIs. The remaining eight loans were taken from informal sources like friends and relatives. The abundance of access is a major factor that influences the choice of borrowers regarding the source of the loan. Prominent MFIs like Grameen Bank and BRAC, mid-sized MFIs like DSK, and smaller local MFIs like Sahaj Sanchay operate in Hrishipara, the area that our project covered. This made it easier for diarists to take multiple loans, either under their names or through accounts owned by people they know. Moreover, most MFIs in Bangladesh have also relaxed their terms of repayment after the pandemic.
The interest rates also vary significantly depending on the source of the loan. In India, banks charge interest rates of 7% to 13%, whereas money lenders charge interest as high as 18%. In Indonesia, the interest rates range from 2% to 24%, and in Bangladesh, they can go as high as 36% per year.
Informal loans from friends or relatives are usually interest-free and have flexible terms of repayment. Hence, these loans are the first choice for many. Informal loans are also the choice of instrument to repay other outstanding loans with stricter terms of repayment.
3. Diarists take loans primarily for business purposes
Case 1: Rajesh Sharma runs a small restaurant in a town in north India. While Rajesh was cautious about taking a loan, he needed credit to purchase a small refrigerator for his shop to store perishable items. Rajesh found it challenging to access credit from a bank due to a lack of collateral. Even from other sources, Rajesh could not find medium to large loans at less than 12-14% annual interest rates. Even providers of small loans usually charge around 18-24% per year. Rajesh finally managed to secure a loan worth INR 18,000 (USD 250) from a local NBFC that he had to repay in 15 monthly installments of INR 1,420 (USD 20). Rajesh found the process convenient as a representative from the company visited his shop to get all the documents filled. Convenience and moderate interest rates were the two key factors for Rajesh.
Case 2: Yuyun is a serial entrepreneur from rural Temanggung, Indonesia. She once rented a shop outside her village to sell airtime and perfume. To open the shop, she took a four-year MFI loan worth IDR 14,500,000 (USD 1,008.74) from CU Lestari. However, since the location was not strategic, the shop failed within three months. To ensure the smooth monthly repayment of her MFI loan and to meet ends, she needed to start another business. For that, she took a one-year loan from neighborhood ASCA, worth IDR 15,000,000 (USD 1,043.53). She used the ASCA loan to open a corner shop from her home selling food and daily needs items and daily necessities and to open a coffee roasting business with her husband. She also once borrowed IDR 1,000,000 (USD 70) from her neighbor to buy coffee beans, which she has repaid within a month. Her corner shop and coffee business run well, helping Yuyun repay her MFI loan. The ASCA loan has also been repaid now, using the money loaned from her sister. She still struggles to repay her sister; fortunately, the repayment term is flexible and with no interest because they are family.
The samples from India, Indonesia, and Bangladesh highlight the difference in behavior regarding loans in South and Southeast Asia. Financial service providers can extract essential lessons from the complete picture of how and why borrowers take loans, their pain points, and the catalysts of loan adoption.
Loans are not always a burden but a stepping stone for growth, as evident in Case 1. Micro and small enterprises need access to finance to scale up and grow their business. Even small loans can have a significant impact on these enterprises. Loans help in consumptions smoothing, to build a cash reserve or to repay another loan, as highlighted in Case 2. However, mostly informal micro-enterprises still struggle with the lack of loan products tailored to their needs.
Easy access to credit and reasonable interest rates can help convert a cautious borrower like Rajesh (Case 1). Simultaneously, while too many options can make it easier to access credit, they can also lead to a string of loans and trap borrowers in a cycle of debt, as seen in the case of Rahmat from Bangladesh.
Stakeholders can learn from the example of CU Lestari—the MFI has attracted numerous LMI customers through its direct approach, such as providing a cash pick-up service for loan repayments. As businesses bounce back after the pandemic and the demand for credit rises, early movers will reap the benefit.
 We have not extracted the diaries data from a representative sample. Hence, the insights cannot be generalized.